Europe

Russia Sanctions Lose Their Bite as U.S. and Europe Pull In Different Directions

As violence flares anew in eastern Ukraine, the U.S. and European Union appear ready to hit Russia with a new round of sanctions. But will the Americans and Europeans act in unison this time?

Since mid-March, Western governments have blacklisted scores of individuals and a handful of companies in an effort to punish President Vladimir Putin and his allies for their actions in Ukraine. “We won’t ease off,” German Chancellor Angela Merkel told reporters in Berlin today, as foreign ministers from Ukraine, Russia, Germany, and France began talks aimed at ending the fighting.

Yet the sanctions now in place seem to have caused no more than moderate inconvenience to their targets—in large part because the measures imposed by the U.S. and its European allies have been out of sync.

The most effective sanctions so far have been those taken by the U.S., targeting business people in Putin’s inner circle, says Sarah Lain, a Russia analyst at the Royal United Services Institute in London. For example, Bank Rossiya, a major bank whose owners include Putin associates Yury Kovalchuk and Gennady Timchenko, has been blocked from offering Visa (V) and MasterCard (MA) services to its customers. Timchenko scrambled to sell off some other holdings, including a stake in an oil-trading group and business-aviation terminals at Moscow and St. Petersburg airports, whose operations could have suffered if they couldn’t do business with Americans.

The EU, though, hasn’t sanctioned Timchenko, and he has continued to do business there. His main investment vehicle, Volga Group, which the U.S. has been blacklisted, is based in EU member country Luxembourg. And just a few weeks ago his construction group Stroytransgaz won a major contract to build part of the South Stream gas pipeline through Bulgaria, another EU member. Timchenko also is actively pursuing business in China, ranging from a possible bottled-water venture to gas-industry construction projects following the signing of a major Russian-Chinese gas deal this year.

Kovalchuk, described by the U.S. as Putin’s “personal banker,” also hasn’t been sanctioned by the EU.

Many of the individuals sanctioned by Europe have been Russian and government officials and military leaders directly involved in the annexation of Crimea and the fighting in eastern Ukraine. Those measures have minimal effect, since the people targeted generally don’t have significant assets in Europe. “They’re targeting the wrong people,” Lain says.

Ineffective European sanctions aren’t the only problem. Bloomberg News last month detailed how Kovalchuk does business with U.S. companies through a complex web of organizations that he partially owns. Still, it would be easier to untangle those relationships if the EU had also put him on a blacklist. For example, Kovalchuk owns a minority stake in a Russian media group that is at least two-thirds owned by a shadowy group of companies in Cyprus, another EU member country.

Why is Europe holding back? The continent’s dependence on Russian gas is one reason. But just as important are the tens of billions of dollars in assets that Russian companies have placed in European tax havens. Wealthy Russians have invested billions more in real estate in Britain, the French Riviera, Switzerland, and elsewhere. “If Europe wants to have some impact on Putin, it will have to experience some pain itself,” Lain says. For now, that seems unlikely.

Even without European cooperation, the U.S. could strike a painful blow against the Russian economy by imposing sanctions on technology and services to the energy sector, which is counting on outside help to develop reserves in the Arctic and elsewhere. That would be politically difficult, though, because of the risk that U.S. suppliers would lose business to European rivals.